Is Japan's Economy on the Mend? Factory Output Jumps

Japan's industrial output unexpectedly rose in October in a sign the world's third-largest economy may have seen the worst of the effects of weak global trade and a diplomatic row with China.

The 1.8 percent rise defied analysts' expectations, who on average had predicted a 2.2 percent decline after a 4.1 percent drop in September.

Manufactures surveyed by the government cut their forecasts for November to a 0.1 percent decline from an earlier 1.6 percent rise, but saw output bouncing back 7.5 percent in December.

"Taken together with steady forecast for November and December, the data showed that the economy is likely to have bottomed out earlier than expected," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Tentative signs of a recovery in manufacturing are unlikely to change the view that Japan's economy is already in recession, so policymakers are still likely to try to stimulate the economy to ensure it resumes growth next year.

The yen is still relatively strong and inflation is far away from the Bank of Japan's 1 percent target, which the main opposition party wants to double, so the central bank remains under immense political pressure to keep dishing out monetary stimulus.

Core consumer prices were flat in October compared with a year earlier, but the November index for Tokyo, available a month before the nationwide data, fell 0.5 percent.

"Even though the economy shows some signs of a pick-up, the BOJ may ease policy further as early as next month if, for example, U.S. monetary easing causes a spike in the yen," UFJ' Shikano said.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index, which provides an alternative reading on the country's manufacturing sector, fell to a seasonally adjusted 46.5 in November from 46.9 in October, signalling that manufacturing contracted at the fastest pace in 19 months.

Separate data related to domestic demand showed encouraging signs. Household spending rose 0.6 percent in October from September, compared with expectations for a 0.4 percent decline, while the jobless rate was steady at 4.2 percent, in line with forecasts.

Japan's economy contracted 0.9 percent in the third quarter and is probably already in recession due to faltering global demand and a territorial dispute with China that led many Chinese consumers to boycott Japanese goods.

However, analysts expect it to return to moderate growth next year as long as the global economy rebounds.

Japanese political parties are promising stimulus packages and other economic measures before a lower house election on Dec. 16, but uncertainty about which party will win a majority has clouded the outlook for policy.